By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer prices recorded their biggest gain in five months in September as the cost of gasoline and rents surged, pointing to a steady pickup of inflation that could keep the Federal Reserve on track to raise interest rates in December.

The Labor Department said on Tuesday its Consumer Price Index increased 0.3 percent last month after rising 0.2 percent in August. In the 12 months through September, the CPI accelerated 1.5 percent, the biggest year-on-year increase since October 2014. The CPI rose 1.1 percent in the year to August.

“The upward creep of prices weakens any argument against a rate increase in December,” said Anthony Karydakis, chief economic strategist at Miller Tabak in New York. “The economy is close to full employment and prices are starting to respond to that reality.”

Last month’s increase in the CPI was in line with economists’ expectations. However, underlying inflation moderated amid a slowdown in the pace of increases in healthcare costs after recent robust gains.

The so-called core CPI, which strips out food and energy costs, gained 0.1 percent last month after climbing 0.3 percent in August. That slowed the year-on-year increase in the core CPI to 2.2 percent following a 2.3 percent rise in August.

But with rents, which account for a larger share of the core CPI, recording their biggest increase in nearly 10 years, and wages pushing higher, economists cautioned against putting too much emphasis on last month’s weak reading.

The U.S. central bank has a 2 percent inflation target and tracks an inflation measure which is at 1.7 percent. Fed Vice Chair Stanley Fischer said on Monday that the U.S. central bank was “very close” to its inflation and employment targets.

“As inflation approaches 2 percent, the argument that the economy has more room to run becomes harder to make and we believe the Fed remains on track for a rate hike in December,” said John Ryding, chief economist at RDQ Economics in New York.

The Fed lifted its short-term interest rate last December and has held it steady since because of persistently low inflation.

The dollar was little changed against a basket of currencies, while prices for longer-dated U.S. Treasuries rose slightly. U.S. stocks rallied, cheered by better-than-expected quarterly earnings from UnitedHealth, Netflix and Goldman Sachs.

FIRMING DEMAND

While the jump in overall inflation was also the result of last year’s lower energy prices dropping out of the calculation, it suggested firming domestic demand.

A 5.8 percent jump in gasoline prices accounted for more than half of the increase in the CPI last month. Americans also paid more for electricity, with prices posting their biggest gain since December 2014.

The price increases are bad news for retirees, with social security recipients only due to get a 0.3 percent cost of living adjustment increase next year. Households, however, got some relief from food prices in September, which were unchanged for a third straight month. The cost of food consumed at home declined for a fifth straight month.

Within the core CPI basket, housing costs rose further in September. Owners’ equivalent rent of primary residence increased 0.4 percent, the largest gain since October 2006, after rising 0.3 percent in August. Rents tend to be sticky and should keep core inflation supported.

Medical care costs rose 0.2 percent last month, the smallest increase since March, after surging 1.0 percent in August. The cost of hospital services was unchanged, while prices for prescription medicine rose 0.8 percent.

The government revised prices for prescription drugs from May through August this year as incorrect data had been used to calculate price changes. Prescription medicine accounts for about 1.4 percent of the CPI basket.

Consumers also paid more for grooming, motor vehicle insurance, tobacco and airline fares. However, prices for communication recorded their largest decline in two years, while heavy discounting by retailers pushed apparel prices down 0.7 percent. Prices for motor vehicles also fell.

“Inflation is moving up, showing this is not an economy that is undergoing serious demand-based weakness,” said Chris Rupkey, chief economist at MUFG Union Bank in New York.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)